Jerry Dryer, editor of the Dairy and Food Market Analyst, attributes the strength in cheese to strong food service demand and exports.

"The demand is there," he said. "The cheese isn't."

Cash block cheese saw its third week of decline but is still holding above $2 and has been there since early June. It closed Friday July 15 with a surprise 5 1/2-cent rebound on the day, at $2.0575 per pound, still 5 1/4-cents below the previous week, but 48 1/4-cents above that week a year ago.

The barrels were steady all week until Friday when they were bid up three quarters to $2.11, 58 1/2-cents above a year ago, and 5 1/4-cents above the blocks. Volume was heavy as a whopping 43 cars of block traded hands on the week and none of barrel. The NASS-surveyed U.S. average block price hit $2.1107, up 2.2 cents. Barrel averaged $2.0991, up 2.6 cents.

FC Stone dairy economist Bill Brooks said the supply demand situation in cheese has shifted a bit. He suggested that the block supply has loosened some, pointing to the 17 loads of block that traded in the Fourth of July holiday-shortened week. The last time trading approached that level was the week of May 16, when 16 loads traded hands.

The profitability of cheese plants seems to have recovered through May and into June, according to Brooks, but he warned of the high temperatures and humidity in the Midwest and that Minnesota's and Wisconsin's milk production lagged year ago levels in May. A fair amount of barrel cheese is produced there. Lagging milk production may be tightening the barrel market. Demand for barrel is probably good, he said, because more people are staying home, eating out less and firing up the barbecue.

Brooks also discussed why the block price is typically 2 or 3 cents above the barrels. Production and packaging costs are a little higher for block cheese, he said, whereas barrel cheese these days is packaged in a fiberboard barrel and is easy to extract for use in further manufacturing "so there's not as much packaging, not as much cost there." Whenever the price spread is inverted -- barrel over block -- the higher costs "squeeze plant margins" he said, especially when you're paying higher prices for the milk.

He expected more cheese to make its way to the CME looking for a home and warned that people will step away from the market once the price starts slipping and that will pull the barrel lower as well. Cash butter held all week at $2.03, 25 1/2-cents above a year ago. Only one car was traded. NASS butter averaged $2.0348, down 5.4 cents.

Cash Grade A nonfat dry milk finished at $1.61, down a penny and a half, and Extra Grade held at $1.61. NASS powder averaged $1.6667, up 0.3 cent, and dry whey averaged 54.16 cents, down 0.6 cent.

Consumption and production

Commercial disappearance of dairy products during the first four months of 2011 totaled 64 billion pounds, according to USDA's latest data, up 2.9 percent from the same period in 2010. Butter was up 15 percent, American cheese was up 4 percent, other cheese was up 7.1 percent, nonfat dry milk was down 5.7 percent, and fluid milk products were off 1.5 percent.

USDA reports that milk production is at or near peak levels in the Pacific Northwest and steady in Utah, Idaho, and the Northeast. It is declining along the seasonal trend in the Central and Mid-Atlantic regions with steeper production declines in the Southeast, Florida, Arizona and portions of California due to heat and or humidity.

"Hot weather has been on everyone's mind, mostly in terms of how it will affect grain prices, but now those concerns are spilling into the milk market," FC Stone dairy broker Dave Kurzawski said. There's plenty of uncertainty. The heat will take its toll on milk output and yields, however economic concerns could hurt dairy demand here in the U.S. and developing countries. Increased milk production in Australia and New Zealand could slow U.S. dairy exports.

Milk production in Oceania is at seasonal low levels and the winter season is under way. Australian winter weather conditions are developing along typical lines, according to USDA. Milk handlers are stating that winter conditions are wetter than usual in some regions, while moisture is in better balance in others.

Australian milk producers are very optimistic about the upcoming season, according to USDA. Much of this optimism comes from an overall positive the winter and provide a positive start to the new season.

Both countries are in the early days of the 2011-12 milk production year, thus it is too early to indicate new trends. Production estimates for the new season over last season are starting to develop; 4 to 5 percent higher in New Zealand and 1 to 2 percent in Australia. Sales activity out of the Oceania region is minimal as stocks are limited and nearing seasonal low levels.

Milk output

The Agriculture Department again raised its 2011 and 2012 milk production forecasts in its latest World Agricultural Supply and Demand Estimates report. Cow number estimates were also raised as higher milk prices and lower forecast feed prices support further herd expansion, but milk per cow was unchanged from last month's report.

Commercial exports on a fat basis were forecast higher for 2011. Ending stock forecasts were raised as cheese stocks are larger than expected. Dairy product price forecasts for 2011 were raised from last month as were Class III and Class IV milk price forecasts, in line with the increased product prices.

Look for 2011 milk output to hit 195.7 billion pounds, up 200 million pounds from the June estimate. The 2012 total is now projected at 198.8 billion pounds, up 300 million from a month ago. These projections compare to 192.8 billion pounds in 2010 and 189.3 billion in 2009.

USDA expects the 2011 Class III milk price to average $18-$18.30 per hundredweight, up from the $17.40-$17.80 projected a month ago. The 2012 range estimate was unchanged, at $16-$17. The 2010 average was $14.41 and $11.36 in 2009.

The 2011 Class IV price is projected to average $19.15-$19.55, up from $18.95-$19.45 last month. The 2012 range is projected at $16.50-$17.60, unchanged from a month ago, and compares to $15.09 in 2010 and $10.89 in 2009.

Grains

U.S. feed grain supplies for 2011-12 were projected higher this month mostly with higher expected beginning stocks and production for corn. Corn beginning stocks were raised 150 million bushels reflecting changes to 2010-11 usage projections.

Corn production for 2011-12 was projected 270 million bushels higher based on planted and harvested area as reported in the Acreage report. Corn use for ethanol was raised 100 million bushels with larger supplies and an improved outlook for ethanol producer margins. Exports were raised 100 million bushels mostly reflecting increased demand from China. Ending stocks for 2011-12 were projected 175 million bushels higher at 870 million. Soybean ending stocks of 175 million bushels were slightly higher than expected.

Corn production for 2011-12 was projected 270 million bushels higher based on planted and harvested area as reported in the Acreage report. Corn use for ethanol was raised 100 million bushels with larger supplies and an improved outlook for ethanol producer margins. Exports were raised 100 million bushels mostly reflecting increased demand from China. Ending stocks for 2011-12 were projected 175 million bushels higher at 870 million. Soybean ending stocks of 175 million bushels were slightly higher than expected.

Milk prices

The federal order Class III contract's average for the last half of 2011 was $18.72 per hundredweight on June 3, $18.34 on June 10 and June 17, $18.21 on June 24, $18.19 on July 1, and $18.54 on July 8.

California's August Class I milk price was announced by the California Department of Food and Agriculture at $23.24 per hundredweight for the north and $23.51 for the south. Both are up 86 cents from July, are $5.91above August 2010, and equate to about $2.00 and $2.02 per gallon respectively.

The 2011 northern price average now stands at $20.27, up from $16.38 a year ago. The southern price average is $20.54, up from $16.65 a year ago. The federal order Class I base price is announced by the USDA on July 22.

The 2011 northern price average now stands at $20.27, up from $16.38 a year ago. The southern price average is $20.54, up from $16.65 a year ago. The federal order Class I base price is announced by the USDA on July 22.

National Milk's Roger Cryan says the federal order Class I milk price "came within a whisker of triggering payments in February, then began rising. Now corn and soybean prices have dropped, widening the gap between projected Class I prices and MILC target rates for the last few months of the fiscal year. No payments are projected through September."

Fonterra auction heats up

California's Milk Producers Council's July 8 newsletter reports that the number of approved bidders for Fonterra's global dairy product auction continues to grow as the number of products offered by Fonterra increases and the prospect of additional suppliers lingers.

The council quoted USDA's Dairy Market News, "Traders and handlers continue to use the gDT auction platform as a component when determining commercial prices but most are not adjusting their prices as sharply as the percentage changes from the previous auction event."

"What began as a noble but self-serving tool intended to provide an important improvement in international price transparency, may be approaching an entirely different stage," the council stated.

Cooperatives Working Together

The Cooperatives Working Together program announced that it accepted eight requests for export assistance from Dairy Farmers of America to sell a total of 648,371 pounds of cheddar cheese to customers in the Middle East, North Africa, Asia and Central America. The product will be delivered through November and raises CWT's 2011 cheese exports to 49.2 million pounds.

Exports steady

Dairy Profit Weekly editor Dave Natzke said the value of May dairy exports was estimated at $401 million, virtually unchanged from April, but 40 percent more than May 2010.

May imports, at $212 million, were down 12 percent from April, and up just 3 percent from a year ago. Thus far in fiscal year 2011, exports are valued at $2.9 billion, with a dairy trade surplus estimated at more than $1 billion.

The U.S. exported 289 million pounds of dairy products in May, about the same as April. Exports were equivalent to 13 percent of U.S. milk solids production during the January-May period, while imports represent 2.7 percent, matching the lowest percentage since 1996, according to Natzke.

The U.S. exported 289 million pounds of dairy products in May, about the same as April. Exports were equivalent to 13 percent of U.S. milk solids production during the January-May period, while imports represent 2.7 percent, matching the lowest percentage since 1996, according to Natzke.

U.S. dairy cattle remain popular on the world market. Exports topped 5,000 head again in May, bringing the yearly total to about 28,500, nearly double the total for the same time last year. Turkey remains the leading market for U.S. dairy cattle, followed by Mexico.

In politics

Draft legislation incorporating key elements of National Milk's Foundation for the Future dairy policy proposal was announced July 13. The text was made available by the House Agriculture Committee's ranking member, Collin Peterson, D-Minn., at democrats.agriculture.house.gov

Lawmakers, farmers, and others can view the language of the proposal prior to its official introduction as a bill.

The action drew criticism from dairy processors.

"We are disappointed that Rep. Collin Peterson is circulating draft legislation that clearly would take the dairy industry in the wrong direction," IDFA CEO Connie Tipton said. "Instead of encouraging job growth and reducing regulation on an already overregulated industry, the discussion draft would impose new and intrusive government mandates on dairy markets at the cost of a growing dairy export business and the jobs that have come with it."